Hedging 9 Nasdaq Stocks That Made New 52-Week Highs Thursday

29 Versus 19

On Thursday, 29 Nasdaq stocks made new 52-week highs (versus 19 that made new 52-week lows). The table below shows the hedging costs of 9 of the stocks that made new highs against greater than 20% declines over the next several months, using optimal puts.

A Comparison

For comparison purposes, I've added the SPDR S&P 500 ETF (NYSEARCA:SPY). First, a reminder about what optimal puts are, and why I've used 20% as a decline threshold; then, a screen capture showing the optimal puts to hedge one of the stocks that made new highs Thursday: Altisource Portfolio Solutions SA (NASDAQ:ASPS).

About Optimal Puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. Portfolio Armor uses an algorithm developed by a finance Ph.D. to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Decline Thresholds

In this context, "threshold" refers to the maximum decline you are willing to risk in the value of your position in a security. You can enter any percentage you like for a decline threshold when scanning for optimal puts (the higher the percentage though, the greater the chance you will find optimal puts for your position). I have used 20% thresholds for each of the securities below. Essentially, 20% is a large enough threshold that it reduces the cost of hedging, but not so large that it precludes a recovery.

The Optimal Puts for ASPS

Below is a screen capture showing the optimal put option contract to buy to hedge 100 shares of ASPS against a greater-than-20% drop between now and April 20, 2012. A note about these optimal put options and their cost: to be conservative, Portfolio Armor calculated the cost based on the ask price of the optimal puts. In practice, an investor can often purchase puts for a lower price, i.e., some price between the bid and the ask.

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